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 A Dissertation Report On ³Bancassurance a boom or a curse for bank customers with reference to banks in janakpuri ´ Submitted in partial fulfillment for the Award of degree of Master of Business Administration ³Amity University Noida U.P´ SUBMITTED BY: Submitted To: Ankur dutta Mr. Rajesh Verma M.B.A semester 4 2010-2012

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A

Dissertation Report

On³Bancassurance a boom or a curse for bank customers with

reference to banks in janakpuri ´

Submitted in partial fulfillment for the

Award of degree of

Master of Business Administration

³Amity University Noida U.P´

SUBMITTED BY: Submitted To:

Ankur dutta Mr. Rajesh Verma

M.B.A semester 4

2010-2012

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INTRODUCTION

BANKING INDUSTRYThe banking structure that India inherited at Independence in 1947 suffered

from two major drawbacks: (i) interlocking of directorship of industry

houses and banks, and (ii) paucity of credit to socially and economically

important sectors of the economy. The numerous problems arising in the

wake of these drawbacks provided the economic rationale for the

momentous decision to nationalize 14 private banks in 1969, as well as for

the subsequent nationalization of six more banks in 1980. The post-nationalization phase was characterized by a strategy of massive expansion

of the banking network coupled with stipulations on sectoral lending. Even

today, when the euphoria over nationalization has given way to

considerable skepticism, it cannot be denied that the liberal branch licensing

norms coupled with a system of directed credit stipulations, made a

significant dent on rural and (to some extent) urban poverty and mitigated

the dependence of the socially and economically disadvantaged groups on

the indigenous money lenders. Additionally many would agree that the

system did contribute to rapid growth by providing timely and concessional

credit to several industrial sectors.

However, the strict regulation over banks¶ lending, combined with

extensive regulation of interest rates across the entire maturity spectrum,

also paved the way for the banking sector to be increasingly cast in the role

of µhandmaiden¶ to government policies. The high CRRs (cash reserveratios) and SLRs (statutory liquidity ratios), though ostensibly serving the

purposes of credit regulation, financial stability and inflation control,

adversely impacted the profitability banks and represented a substantial

(about 63.5%) pre-emption of bank resources. Additionally, the

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administered interest structure, assumed over time, an extremely complex

character, with rates being distinguished according to bank size, maturity

profile and economic conditions, which permitted only a limited role for

market forces in the pricing and allocation of credit. It was inevitable that

such a highly regulated banking system should get riddled with

administrative inefficiencies and red-tape. The constellation of economic

features resulting from these developments is usually subsumed under the

rubric of ³financial repression´.

A process of liberalization of the economy was initiated in India in 1991-92,

which aimed at raising the allocative efficiency of available savings,

improving the return on investments and promoting accelerated andequitable growth of the real sector. Towards this end, a multi-pronged

reform strategy was initiated encompassing all areas of economic activity.

In the financial sector specifically, the thrust of the reforms was to promote

a diversified, efficient and competitive financial system. While these

reforms were underway, the world economy also witnessed significant

changes, coinciding with the movement towards global integration of

financial services.

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The usage of the word picked up as banking and insurance companies mergedtogether and banks sought to provide insurance, in the market which has beenliberalized recently.But it is a controversial issue as many experts feels that this ides gives bankingsector too great a control over financial market in that country. Therefore it has also

been restricted in many countries too.

But, still which countries have permitted Bancassurance in their market has seen atremendous boom in that sector. The share of premium collected by them hasincreased in constant and decent manner. This success coincided with a favorabletaxation for life insurance products, as well as with the consumers' growing needs,in terms of middle and long term savings, which is due to an inadequacy of the

pension schemes in India.The links between bank and insurance takes place through various ways(distribution agreements, joint ventures, creation of a company new company)which gives rise to a complete upheaval concerning marketing strategies and thesetting up of insurance products' distribution. More and better insurance startscoming in market.

This stream of market has just been opened very recently for the Indian market andthere is lot of development left to be done by the government and regulatoryauthority. But this has proven to be a boom for the Insurance and Bankingcompanies together and both the different sector of the industry has shown better result and improvement in their own field due coming of the whole new concept of BANCASSURANCE .

FinancialServices

Banking

Bancassurance

Insurance

Bancassurance

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Bancassurance in its simplest form is the distribution of insurance products througha bank¶s distribution channels. It is the provision of insurance and banking productsand service through a common distribution channel or through a common base.

Banks, with their geographical spreading penetration in terms of customer¶s reach

of all segments, have emerged as viable source for the distribution of insurance products. It takes various forms in various countries depending upon thedemography and economic and legislative climate of that country. This conceptgained importance in the growing global insurance industry and its search for newchannels of distribution.However, the evolution of bancassurance as a concept and its practicalimplementation in various parts of the world, have thrown up a number of opportunities and challenges.

The concept of bancassurance was evolved in Europe. Europe leads the world inBancassurance market penetration of banks assurance in new life business in

Europe which ranges between 30% in United Kingdom to nearly 70% in France.However, hardly 20% of all United States banks were selling insurance against70% to 90% in many Western European countries. In Spain, Belgium, Germanyand France more than 50% of all new life premiums is generated by banksassurance. In Asia, Singapore, Taiwan and Hong Kong have surged ahead inBancassurance then that with India and China taking tentative step forward towardsit. In Middle East, only Saudi Arabia has made some feeble attempts that evenfailed to really take off or make any change in the system.

The motives behind bancassurance also vary. For Banks, it is n means of productdiversification and source of additional fee income. Insurance companies see

bancassurance as a tool for increasing their market penetration and premiumturnover. The customer sees bancassurance as a bonanza in terms of reduced price,high quality products and delivery at the doorsteps.

With the liberalization of the insurance sector and competition tougher than ever before,companies are increasingly trying to come out with better innovations to stay that one-stepahead.

Progress has definitely been made as can be seen by the number of advanced productsflooding the market today - products with attractive premiums, unitized products, unit-linked products and innovative riders. But a hitherto untapped field is the one involving thedistribution of these insurance products.

Currently, insurance agents are still the main vehicles through which insurance productsare sold. But in a huge country like India, one can never be too sure about the levels of

penetration of a product. It therefore makes sense to look at well-balanced, alternativechannels of distribution.

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Nationalized insurers are already well established and have an extensive reach and presence. New players may find it expensive and time consuming to bring up a distributionnetwork to such standards. Yet, if they want to make the most of India's large population

base and reach out to a worthwhile number of customers, making use of other distributionavenues becomes a must. Alternate channels will help to bring down the costs of

distribution and thus benefit the customers

What is bank assurance?

Bancassurance is the distribution of insurance products through a bank's distributionchannels. It is a service that can fulfill both banking and insurance needs at the same time.Bancassurance as a concept first began in India when the insurance industry opened up to

private participation in December 1999. There are basically four models of bancassurance:

y Distribution alliance between the insurance company and the bank.y Joint venture between the two companies.y Mergers between a bank and insurer.y Bank builds or buys own insurance products.

Most of the bancassurance operations fall in the first model.

H ow does it help?

y

Every insurance company has a wants to grow quickly to reduce painful start-upexpense overruns. Banks with their huge networks and large customer bases giveinsurers an opportunity to do this efficiently.

y It gives the companies an opportunity to tap the rural sectors. Selling insurancethrough traditional methods in these sectors falls very expensive. A tie up with a

bank with an appropriate customer base can give an insurer a cheap access to theseareas.

y Banassurance enables to have a huge pool of skilled professionals.y The margins of the banks in their core lending business are declining sharply.

Opportunities like banassurance augment their income.y Banassurance enables to develop a sales culture within the bank. It helps to change

the traditional mindset of banking companies.

Though a relatively new concept, banassurance has been a phenomenal success in most of the cases. Currently banks are not just lending organizations but are emerging as morediverse financial institutions. The distribution of insurance products through banks has

been beneficial to both insurance and banking companies as well as the customers

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Why should banks enter insurance?

There are several reasons why banks should seriously consider Bancassurance, the mostimportant of which is increased return on assets (ROA). One of the best ways to increaseROA, assuming a constant asset base, is through fee income. Banks that build fee income

can cover more of their operating expenses, and one way to build fee income is through thesale of insurance products. Banks that effectively cross-sell financial products can leveragetheir distribution and processing capabilities for profitable operating expense ratios.

By leveraging their strengths and finding ways to overcome their weaknesses, banks couldchange the face of insurance distribution. Sale of personal line insurance products through

banks meets an important set of consumer needs. Most large retail banks engender a greatdeal of trust in broad segments of consumers, which they can leverage in selling them

personal line insurance products. In addition, a bank¶s branch network allows the face toface contact that is so important in the sale of personal insurance.

Another advantage banks have over traditional insurance distributors is the lower cost per sales lead made possible by their sizable ,loyal customer base. Banks also enjoy significant

brand awareness within their geographic regions, again providing for a lower per-lead costwhen advertising through print, radio and/or television. Banks that make the most of theseadvantages are able to penetrate their customer base and markets for above-average marketshare.

Other bank strengths are their marketing and processing capabilities. Banks have extensiveexperience in marketing to both existing customers (for retention and cross selling) andnon-customers (for acquisition and awareness). They also have access to multiplecommunications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc.

Banks' proficiency in using technology has resulted in improvements in transaction processing and customer service.

By successfully mining their customer databases, leveraging their reputation and'distribution systems¶ (branch, phone, and mail) to make appointments, and utilizing 'salestechniques¶ and products tailored to the middle market, European banks have more thandoubled the conversion rates of insurance leads into sales and have increased sales

productivity to a ratio which is more than enough to make Bancassurance a highly profitable proposition.

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The Legal RequirementsRBI guideline for banks entering into insurance sector provides three options for banks.They are:

y Joint ventures will be allowed for financially strong banks wishing to undertakeinsurance business with risk participation;

y For banks which are not eligible for this joint-venture option, an investment optionof up to 10% of the net worth of the bank or Rs.50 crores, whichever is lower, isavailable;

y Finally, any commercial bank will be allowed to undertake insurance business asagent of insurance companies. This will be on a fee basis with no-risk participation.

The Insurance Regulatory and Development Authority (IRDA) guidelines for the bancassurance are:

y Each bank that sells insurance must have a chief insurance executive to handle allthe insurance activities.

y All the people involved in selling should under-go mandatory training at aninstitute accredited by IRDA and pass the examination conducted by the authority.

y Commercial banks, including cooperative banks and regional rural banks, may become corporate agents for one insurance company.

y Banks cannot become insurance brokers.

Banking on Bancassurance

Though much ado was made about bancassurance, an alternate channel to hawk risk products through banks, the channel is yet to pick up pace as of today. Most of theinsurance companies have already tied up with banks to explore the potential of thechannel that has been a success story in Europe and legislations are also in place. For insurance companies and banks the convergence brings about benefits for both but thenwhat¶s stopping it from taking off in a big way?

Bancassurance primarily banks on the relationship the customer has developed over a period of time with the bank. And pushing risk products through banks is a cost-effectiveaffair for an insurance company compared to the agent route, while, for banks, consideringthe falling interest rates, fee based income coming in at a minimum cost is more thanwelcome.

SBI Life Insurance Company a predominant player in bancassurance is positive about thechannel bringing about a transformation in the way insurance has been sold so far. The

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company is ba RBI guideline for banks entering into insurance sector provides threeoptions for banks. They are:

nking heavily on bancasurance and plans to explore the potential of State Bank of India¶s

9000 plus branches spread across the country and also its 4000 plus associate banks - oneof the reasons why SBI Life Insurance is not laying much emphasis on increasing its agentforce from the present 3000.

The company plans to appoint Certified Insurance Facilitators (CIFs) in a phased manner at its branches. For now around 320 CIFs, one from each of its bank branches have beenidentified for the purpose in addition to setting up insurance counters at its banking outlets.The number is expected to go up to 500. µOut of our present business of around Rs 150-200 crore bancassurance has brought in 50 percent while corporate agency and the agentchannel have contributed about 10 percent and 40 percent respectively¶, says PradeepPandey, Head, PR, SBI Life Insurance Company. The company aims at acquiring 75

percent of the total business through bancassurance and the balance through the other channels by 2007.

Various models are used by banks for bancassurance. One is the insurance salesman of therespective company being posted in the bank, the other is where a select group of wealthmanagement people of the bank sell insurance and the third is where the bank employeesare incentivised to hawk insurance products.

But the pertinent question is how far will bancassurance succeed when insurance is a product that is sold not bought in our country. Insurance needs hard selling but banks havenever been aggressive about selling financial products. Says Pradeep Pandey¶ I agree that

in our country insurance awareness is low but with falling interest rates, banks are on thelook out for additional revenue and bancassurance can provide them fee based income ± insurance is one outlet where income can be gained. And the cost that banks have to incur is minimal. With all the other infrastructure in place already, the cost is only about traininga few individuals¶.

And will products sold through bancassurance be any different? µThe products sold will bethe same. In the first phase we plan to sell endowment and pension¶ opines Mr Pandey,SBI Life Insurance. On the contrary Shivaji Dam, CEO, OM Kotak Mahindra LifeInsurance begs to differ,¶Yes products will have to be different to be sold through

bancassurance. They will have to be term and savings products with not much of complications. In other words products that are static and simple¶

OM Kotak Mahindra Life Insurance has tied up with Dena Bank and its own Kotak Bank for bancassurance. The company is targeting around 10 percent of the business during itsstart up phase. Adds Shivaji Dam,¶ Our focus will not be the affluent class but the middleclass¶ But in case of SBI Life there is no such emphasis on a segment of the population

perhaps considering the wide reach its bank branches have even in the remotest corners of

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the country. Also SBI Life plans to offer its complete basket of products but OM Kotak will be selling select products.

Insurers are no doubt optimistic about the channel but it does come with a few limitations.While sale of insurance comes at a lower cost through this channel in comparison to the

agency route and the insurance company gains much through the large bank network spread across the country the potential can be impeded if bank officials do not activelygenerate leads.

Also it is yet to be seen how far buying shelf space in a bank helps push sale of insurance.Besides the target audience is limited to those individuals who visit the bank during theworking hours. And with technology changing at a rapid pace ATMs and internet bankinghave been reducing the individual¶s visits to the bank which could perhaps be a dampener for bancassurance.

Insurance companies are positive about the bancassurance channel raking in volume

business at a low cost and banks have been salivating over the fee-based income that it will bring. But unless products are simple, easy to understand and easy to market much of the benefits the bancassurance channel holds, may remain only on paper.

Will bancassurance click?

Bancassurance, the much talked about channel of insurance distribution through banks thatoriginated in France and which has been a success story in Europe is yet to take off here. Anumber of insurers have already tied up with banks and some banks have already flaggedoff bancassurance through soft launches of select risk products. While reams have beenwritten about the numerous benefits of bancassurance considering the wide scale

availability of risk products it will enable, rules and regulations regarding the same are yetto fall in place.

Fee based income:

For banks, bancassurance would mean a major gain. Since interest rates have been fallingand profit on offtake of credit has been low all banks have been able to do is sustainthemselves but not profit much. Enter bancassurance and fee based income throughhawking of risk products would be guaranteed.

Unique strategies:

Before taking the plunge, banks as also insurers need to work hard on chalking outstrategies to sell risk products through this channel especially in an emerging market asours. Through tie-ups some insurers plan to buy shelf space in banks and sell insurance tothose who volunteer to purchase them. But unless banks set up a trained task force that willfocus on hard-selling risk products, making much headway is difficult especially with afinancial product that is not so easily bought over the counter.

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Identifying Target audience:

Besides, identifying the target audience is yet another important aspect. Banks have a largedepositor base of corporate as well as retail clients they can tap. Talking of retail clients thelower end and middle-income group customers constitute a major chunk who have over a

period of time built a good rapport with the bank staff and thus hold big potential for bancassurance.

Reduced costs:

While products such as retirement planning will involve an elaborately worked out planwith the help of a financial advisor, simple products such as an accident cover in other words pure risk products will be sold through this channel enabling savings on solicitationcosts of these products. So will insurers pass on a part of the gains on cost saving (savingon agent training etc) to customers? At present insurers are non-committal on this one.Also there are no immediate plans to redesign products to suit the bancassurance channel

but banks are gung-ho about cross-selling products.

Legal issues:

Conversely, the Insurance Regulatory Development Authority (IRDA) has adopted acautious approach before Bancassurance is flagged off. While on the one hand it is aneconomical proposition to sell risk products through the numerous bank branches spreadacross the country the fact that claim settlement disputes take an unusually long time in our country is one of the causes for worry. In such a situation will banks be in a position tofight for the cause of their clients is a major concern? Besides regulatory authorities for

both - banks and insurance companies are different. Moreover, banks may have to partwith confidential information about their clients. Now where should banks draw a line?

T H E WIN ± WIN CONDITION FOR BANKS AND INSURANCECOMPANIES.

Banks Insurance

y Customer retentiony Revenues and channel

of diversification

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y Satisfaction of morefinancial need under same roof.

y Quality customer access.

y Revenuediversification

y Establish a low costacquisition channel.

y More Profitableresources utilization.

y Creation of BrandImage.

y Establish salesorientated culture.

y Quicker Geographicalreach.

y Enrich work environment.

y Leverage servicesynergies with Bank.

Bancassurance in India - A SWOT Analysis

Even though, banks and insurance companies in India are yet to exchange their weddingrings, Bancassurance as a means of distribution of insurance products is already in force insome form or the other. Banks are selling Personal Accident and Baggage Insurance

directly to their Credit Card members as a value addition to their products. Banks also participate in the distribution of mortgage linked insurance products like fire, motor or cattle insurance to their customers. Banks can straightaway leverage their existingcapabilities in terms of database and face to face contact to market insurance products togenerate some income for themselves which hitherto was not thought of.

Once Bancassurance is embraced in India with full force, a lot will be at stake. Hugecapital investment will be required to create infrastructure particularly in IT and

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telecommunications, a call center will have to be created, top professionals of bothindustries will have to be hired, an R & D cell will need to be created to generate new ideasand products. It is therefore essential to have a SWOT analysis done in the context of Bancassurance experiment in India.

StrengthsIn a country of 1 Billion people, sky is the limit for personal lines insurance products.There is a vast untapped potential waiting to be mined particularly for life insurance

products. There are more than 900 Million lives waiting to be given a life cover (totalnumber of individual life policies sold in 1998-99 was just 91.73 Million). There are about200 Million households waiting to be approached for a householder's insurance policy.Millions of people travelling in and out of India can be tapped for Overseas Mediclaim andTravel Insurance policies. After discounting the population below poverty line the middlemarket segment is the second largest in the world after China. The insurance companiesworldwide are eyeing on this, why not we preempt this move by doing it ourselves?

Our other strength lies in a huge pool of skilled professionals whether it is banks or insurance companies who may be easily relocated for any Bancassurance venture. LIC andGIC both have a good range of personal line products already lined up, therefore R & Defforts to create new products will be minimal in the beginning. Additionally, GIC with4200 operating offices and LIC with 2048 branch offices are almost already omnipresent,which is so essential for the development of any Bancassurance project.

Weaknesses

The IT culture is unfortunately missing completely in all of the future collaborators i.e. banks, GIC & LIC. A late awakening seems to have dawned upon but it is a case of toolate and too little. Elementary IT requirement like networking (LAN) is not in place evenin the headquarters of these institutions, when the need today is of Wide Area Network (WAN) and Vast Area Network (VAN). Internet connection is not available even to themanagers of operating offices.

The middle class population that we are eyeing at are today overburdened, first byinflationary pressures on their pockets and then by the tax net. Where is the money left tothink of insurance ? Fortunately, LIC schemes get IT exemptions but personal line

products from GIC (mediclaim already has this benefit) like householder, travel, etc. alsoneed to be given tax exemption to further the cause of insurance and to increase domesticrevenue for the country.

Another drawback is the inflexibility of the products i.e. it can not be tailor made to therequirements of the customer. For a Bancassurance venture to succeed it is extremelyessential to have in-built flexibility so as to make the product attractive to the customer.

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Opportunities

Banks' database is enormous even though the goodwill may not be the same as in case of their European counterparts. This database has to be dissected variously and varioushomogeneous groups are to be churned out in order to position the Bancassurance

products. With a good IT infrastructure, this can really do wonders.

Other developing economies like Malaysia, Thailand and Singapore have already taken aleap in this direction and they are not doing badly. There is already an atmosphere createdin the country for liberalisation and there appears to be a political consensus also on thesubject. Therefore, RBI or IRA should have no hesitation in allowing the marriage of thetwo to take place. This can take the form of merger or acquisition or setting up a jointventure or creating a subsidiary by either party or just the working collaboration between

banks and insurance companies.

Threats

Success of a Bancassurance venture requires change in approach, thinking and work culture on the part of everybody involved. Our work force at every level are so wellentrenched in their classical way of working that there is a definite threat of resistance toany change that Bancassurance may set in. Any relocation to a new company or subsidiaryor change from one work to a different kind of work will be resented with vehemence.

Another possible threat may come from non-response from the target customers. Thishappened in USA in 1980s after the enactment of Garn - St Germaine Act. A rush of jointventures took place between banks and insurance companies and all these failed due to thenon-response from the target customers. US banks have now again (since late 1990s)turned their attention to insurance mainly life insurance.

The investors in the capital may turn their face off in case the rate of return on capital fallsshort of the existing rate of return on capital. Since banks and insurance companies havemajor portion of their income coming from the investments, the return from Bancassurancemust at least match those returns. Also if the unholy alliances are allowed to take placethere will be fierce competition in the market resulting in lower prices and theBancassurance venture may never break-even.

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Benefits and value proposition in bancassurance

Advantages to banks

y Productivity of the employees increases.y By providing customers with both the services under one roof, they can improve

overall customer satisfaction resulting in higher customer retention levels.y Increase in return on assets by building fee income through the sale of insurance

products.y Can leverage on face-to-face contacts and awareness about the financial conditions

of customers to sell insurance products.y Banks can cross sell insurance products Eg: Term insurance products with loans.

Advantages to insurers

y Insurers can exploit the banks' wide network of branches for distribution of products. The penetration of banks' branches into the rural areas can be utilized tosell products in those areas.

y Customer database like customers' financial standing, spending habits, investmentand purchase capability can be used to customize products and sell accordingly.

y Since banks have already established relationship with customers, conversion ratioof leads to sales is likely to be high. Further service aspect can also be tackledeasily.

Advantages to consumers

y Comprehensive financial advisory services under one roof. i.e., insurance servicesalong with other financial services such as banking, mutual funds, personal loansetc.

y Enhanced convenience on the part of the insuredy Easy access for claims, as banks is a regular go.y Innovative and better product ranges

The other benefits includey Better customer retention and stronger relationships.y Clear competitive advantage in the rural areas.y Possibility that the insurer¶s account as well as the accounts from the claimants will

remain with the bank.y Insurance products can augment the value of the banking products and services.y Banks are in better position to offer complete integrated financial solutions.

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Value Propositions

The services offered by the banks as well as the insurance companies, are related to assetsand risks. They have to be managed. These institutions manage risks and assets for thecustomers, reducing and taking over the risks and transforming the assets. The cores of the

businesses are similar, though not same. The basic values offered by banks, Insurancecompanies and other financial institutions are indicated below.

Banks offer to its customers liquidity (while at the same time making long term loans),safety, trust (managing estates on behalf of beneficiaries), collection of interest or dividends payments of commitments (rentals and insurance premiums for example) andannuities. Insurers primarily protect clients from risks (political, financial, commercial,

business, and human). In life insurance, there is major component of management of anasset, which is created by the policy. The benefits of the insurer¶s expertise in assetmanagement, passes on the clients by way of premiums levels and bonuses. The liquidityconcerns of insurers are different from liquidity concerns of banks.

Securities firm primarily provide information and advice. They also act as brokers or agents for the customers, but not take responsibility for risks and assets. Pension fundsmanage the saving made directly or through employers and help the pensioners manage therisks of loss of income in old age. Mutual funds are asset transformers, providing smallsavers easy access to complex portfolios of capital market, without sacrificing the needs of liquidity.

Most customers, big and small, individual and companies are all interested in all theseservices. That is the justification for concept of a single window for all financial services.

Bancassurance is a step in this evolution

Marketing and Distribution Channels in Bancassurance

One of the most significant changes in the financial services sector over the past few yearshas been the growth and development of bancassurance. Banking institutions andinsurance companies have found bancassurance to be an attractive and profitablecomplement to their existing activities. The successes demonstrated by various

bancassurance operations particularly in Europe have triggered an avalanche of mergersand acquisitions across continents and efforts are on to replicate the early success of

bancassurance in other parts of the world as well.

Distribution is the key issue in bancassurance and is closely linked to the regulatoryclimate of the country. Over the years, regulatory barriers between banking and insurancehave diminished and has created a climate increasingly friendly to bancassurance. The

passage of Gramm-Leach Bliley Act of 1999 in US and IRDA Bill in India in 2000 have

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stimulated the growth of bancassurance by allowing use of multiple distribution channels by banks and insurance companies.

Bancassurance experience in Europe as well as in other select countries offers valuableguidance for those interested in insurance distribution through the banking channel indeveloping markets. Many banks and insurers are looking with great interest at buildingnew revenue through bancassurance - including large, traditional companies that wouldn'thave considered such an approach about a decade ago. Of particular interest, many believe,is the potential for bancassurance in developing economies such as those of Latin Americaand Southeast Asia.

Distribution channels in Bancassurance Traditionally, insurance products have been promoted and sold principally through agencysystems in most countries. With new developments in consumers¶ behaviors, evolution of technology and deregulation, new distribution channels have been developed successfullyand rapidly in recent years. Bancassurers make use of various distribution channels:

-Career Agents

-Special Advisers

-Salaried Agents

-Bank Employees / Platform Banking

-Corporate Agencies and Brokerage Firms

-Direct Response

-Internet

-e-Brokerage

-Outside Lead Generating Techniques

The main characteristics of each of these channels are:

Career Agents : Career Agents are full-time commissioned sales personnel holdingan agency contract. They are generally considered to be independent contractors.Consequently an insurance company can exercise control only over the activities of theagent which are specified in his contract. Despite this limitation on control, career agentswith suitable training, supervision and motivation can be highly productive and costeffective. Moreover their level of customer service is usually very high due to the renewalcommissions, policy persistency bonuses, or other customer service-related awards paid tothem.

Many bancassurers, however avoid this channel, believing that agents might oversell out of their interest in quantity and not quality. Such problems with career agents usually arise,

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not due to the nature of this channel, but rather due to the use of improperly designedremuneration and/or incentive packages.

Special Advisers: Special Advisers are highly trained employees usually belonging tothe insurance partner, who distribute insurance products to the bank's corporate clients.Banks refer complex insurance requirements to these advisors. The Clients mostly includeaffluent population who require personalised and high quality service. Usually Specialadvisors are paid on a salary basis and they receive incentive compensation based on their sales.

Salaried Agents : Having Salaried Agents has the advantages of them being fullyunder the control and supervision of bancassurers. These agents share the mission and

objectives of the bancassurers. Salaried Agents in bancassurance are similar to their counterparts in traditional insurance companies and have the same characteristics as career agents. The only difference in terms of their remuneration is that they are paid on a salary

basis and career agents receive incentive compensation based on their sales. Some bancassurers, concerned at the bad publicity which they have received as a result of their career agents concentrating heavily on sales at the expense of customer service, havechanged their sales forces to salaried agent status.

Platform Bankers : Platform Bankers are bank employees who spot the leads in the banks and gently suggest the customer to walk over and speak with appropriate

representative within the bank. The platform banker may be a teller or a personal loanassistant and the representative being referred to may be a tarined bank employee or arepresentative from the partner insurance company.

Platform Bankers can usually sell simple products. However, the time which they candevote to insurance sales is limited, e.g. due to limited opening hours and to the need to

perform other banking duties. A further restriction on the effectiveness of bank employeesin generating insurance business is that they have a limited target market, i.e. thosecustomers who actually visit the branch during the opening hours.

In many set-ups, the bank employees are assisted by the bank's financial advisers. In bothcases, the bank employee establishes the contact to the client and usually sells the simple

product whilst the more affluent clients are attended by the financial advisers of the bank which are in a position to sell the more complex products. The financial advisers either sellin the branch but some banks have also established mobile sales forces.

If bank employees only act as "passive" insurance sales staff (or do not actively generateleads), then the bancassurer's potential can be severely impeded. However, if bank employees are used as "active" centres of influence to refer warm leads to salaried agents,career agents or special advisers, production volumes can be very high and profitable to

bancassurers.

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Set-up / Acquisition of agencies or brokerage firms : In the US, quitea number of banks cooperate with independent agencies or brokerage firms whilst in Japanor South Korea banks have founded corporate agencies. The advantage of sucharrangements is the availability of specialists needed for complex insurance matters and -inthe case of brokerage firms - the opportunity for the bank clients to receive offers not onlyfrom one insurance company but from a variety of companies. In addition, these saleschannels are more conceived to serve the affluent bank client.

Direct Response : In this channel no salesperson visits the customer to induce a saleand no face-to-face contact between consumer and seller occurs. The consumer purchases

products directly from the bancassurer by responding to the company's advertisement,mailing or telephone offers. This channel can be used for simple packaged products whichcan be easily understood by the consumer without explanation .

Internet : Internet banking is already securely established as an effective and profitable basis for conducting banking operations. The reasonable expectation is that personal banking services will increasingly be delivered by Internet banking. Bancassurers can alsofeel confident that Internet banking will also prove an efficient vehicle for cross selling of insurance savings and protection products. It seems likely that a growing proportion of theaffluent population, everyone's target market, will find banks with household name brandsand proven skills in e-business a very acceptable source of non-banking products.

There is now the Internet, which looms large as an effective source of information for

financial product sales. Banks are well advised to make their new websites as interactive as possible, providing more than mere standard bank data and current rates. Functionsrequiring user input (check ordering, what-if calculations, credit and account applications)should be immediately added with links to the insurer. Such an arrangement can also

provide a vehicle for insurance sales, service and leads.

E-Brokerage : Banks can open or acquire an e-Brokerage arm and sell insurance products from multiple insurers. The changed legislative climate across the world shouldhelp migration of bancassurance in this direction. The advantage of this medium is scale of operation, strong brands, easy distribution and excellent synergy with the internet

capabilities.

Outside Lead Generating Techniques : One last method for developing bancassurance eyes involves "outside" lead generating techniques, such as seminars, directmail and statement inserts. Seminars in particular can be very effective because in a non-threatening atmosphere the insurance counselor can make a presentation to a small group

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of business people (such as the local chamber of commerce), field questions on the topic,then collect business cards. Adding this technique to his/her lead generation repertoire, aninsurance counselor often cannot help but be successful.

To make the overall sales effort pay anticipated benefits, insurers need to also help their bank partners determine what the ³hot buttons´ will be for attracting the attention of thereader of both direct and e-mail. Great opportunities await bancassurance partners todayand, in most cases, success or failure depends on precisely how the process is developedand managed inside each financial institution. This includes the large regional bank and thesmall one-unit community bank.

Bancassurance Ventures Must H ave Clear Objectives

Insurers Banks

Be aligned with good Penetrate client base

Public image of bank further with more productsForge relationship Leverage positive imageEarlier in customer¶s life Increase customer loyalty&

Lower acquisition costs retention

Customers

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Requirements for success in Bancassurance

Attractive Insurance Product Base

Cost-Efficient Distribution System

Linked and Leveraged Bank and Insurance Products

Concurrent Sale of Bank and Insurance Products

Appropriate Structure Based on Level of Integration Between Bank and Insurer

Achieving Success

To achieve success in bancassurance, Asian companies must overcome a host of challenges. Some are cultural, while others reflect a lack of incentives to generate sales aswell as the natural conflicts between banking and insurance products. The most successful

products from a sales perspective are those that are linked to banking products (e.g., loansand credit insurance) or that are very similar to banking deposits (certainly in the initialstages of the bancassurance operation) and offer superior returns to deposits, albeit over alonger term than the usual time deposits.

Some obstacles are country specific. For example, in South Korea, each bancassurer musthave at least three life partners and three non-life partners, and all of these partners mustreceive less than 50% of the new business generated by the bank, in their respective

sectors, in any given quarter.

Not withstanding the many obstacles to success and challenges faced, bancassuranceventures have enjoyed success in Asia. For example, Exhibit 3 shows the impressiveemergence of bancassurance in Hong Kong. Prior to 1999, market share attributable to

bancassurers was minimal.

To achieve the level of success of bancassurance, banks will need to own insurancecompanies or work very closely with insurance company partners to restructure the valuechain and provide products suitable for bank customers. As long as regulatory constraintsexist, alliances will be a critical part of the effort by US banks to establish their insurance

business. Banks must develop successful alliances in the near term and use thoseexperiences to evaluate the opportunity to buy or build insurance companies as regulationschanges. There are five key approaches to forming insurance partnerships that form acontinuum from complete outsourcing to complete ownership: list rental, working with athird party marketer, agency purchase, integrated alliance, and ownership. Each of theseapproaches involves a different level of value chain ownership and control.

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The Indian Context

In India, no company is allowed to transact both insurance and banking business. Theyare kept separate. In fact, even a company registered, as an insurer has to choose

between life and non-life business. It cannot do both: Therefore, the banks in Indiacannot have the advantages, which are available in the European context.

There are joint ventures in India between banks and foreign insurers. State Bank of India, HDFC, ICICI and Vysya Bank are example. But apart from a greater willingnessto help each other, the joint venture will not give either party a greater advantage in theother's business. The joint venture is an entirely independent unit of Operation withseparate personnel and funds and subject to different regulations.

The only way in which banks can be associated with the insurance business in India is by becoming a corporate agent, for remuneration. The bank can do so for a particular lifeinsurer and/or particulars non-life insurer. The bank cannot develop any of its intimatecontacts with the customers. Since 2000many banks and insurers have agreed toarrangement for mutual benefits. The LIC has tied with more than one bank. So also have other insurers.

For more than a hundred years., insurance business had been sold through insuranceagent and their supervisors. This system had not been very satisfactory. The LICinherited this system .The efforts to make the agents more professional had not yieldedvery satisfactory results, despite incentives and training programmes. Many of themcontinue to treat the agency business casually, as just a source of additional income.The turnover had been high and the efforts of replenishing the strength, costly. The

banks have skilled staff, to which the procurement of insurance can reassigned as a duty.This was an opportunity made available after the regulation of IRDA.

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Bancassurance in India

Bancassurance commonly means selling insurance products under the same roof of a bank.Though bancassurance had roots in France in the 1980s, and spread across different partsof Continental Europe since, it has spread its wings in Asia ± in particular, in India.

In India, there are a number of reasons why bancassurance could play a natural role in theinsurance market. First, banks have a huge network across the country. Second, banks canoffer fee-based income for the employees for insurance sales. Third, banks are culturallymore acceptable than insurance companies. Dealing with (life) insurance, in many parts of India, conjure up an image of a bad omen. Some bank products have naturalcomplementary insurance products. For example, if a bank gives out a home loan, it mightinsist on a life insurance cover so that in case of death of the borrower, there is no problemin paying off the home loan.

Bancassurance is: ³The provision of a complete range of banking, investment andinsurance product and services, to meet the individual needs of the customers of the bank and its associates.´

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SOME INPORTANT BANCASSURANCE TIE ± UPS

INSURANCE BANKS

LIFE INSURANCE CORPORATION(LIC)

Corporation Bank, IndianOverseas Banks, CenturionBank, Satara District Bank,Cooperative Bank, JanataUrban Cooperative Bank,Yeotmal Mahila Sahkari Bank,Oriental Bank of Commerce.

BIRLA SUN LIFE INSURANCE

The Bank of Rajasthan,Andhra Bank, Bank of Muscat,Development Credit Bank,Deutsche Bank and CatholicSyrian Bank.

DABUR CGU LIFE INSURANCECOMPANY PVT LTD

Canara Bank, Lakshmi VilasBank, American Express Bank,ABN Amro Bank.

HDFC STANDARD LIFEINSURANCE CO. Union Bank of India.

ICICI PRUDENTIAL LIFEINSURANCE CO.

Lord Krishna Bank, ICICIBank, Bank of India, Citibank,Allahabad Bank, Federal Bank,South Indian Bank, Punjab &

Maharashtra co-operativeBank.

NATIONAL INSURANCE CO. City Union Bank.

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Bancassurance: Taking the lead

In the last financial year, India has experienced a substantial growth in the life insurance business. The new business premium growth rate for the financial year 2004-05 over the previous financial year is 36%. This growth is primarily due to the aggressivenesswitnessed in the private life insurance sector, which grew by 129%.

One of the drivers for this substantial growth is the contribution of the banking industry.The private life insurers have been instrumental in building strong relationships withestablished banks for bancassurance. The bancassurance model, in simple terms meansdistribution of insurance products by banks to their customers. Apart from having theadvantage of reaching out to the potential customers at the remotest of places, it offers acomplete basket of financial advice to customers under one roof.

Bancassurance has been a successful model in the European countries contributing 35% of premium income in the European life insurance market. It contributes over 65% of the lifeinsurance premium income in Spain, 60% in France, 50% in Belgium and Italy.

In the US, the banks were earlier not allowed to sell insurance due to the restrictionsimposed by Glass-Stegall Act of 1933, which acted as a Chinese wall between banking andinsurance. As a result of this life insurance was primarily sold through individual agents,who focussed on wealthier individuals, leading to a majority of the American middle classhouseholds being under-insured. With the repealing of this Act in 1999, the doors wereopened for banks to distribute insurance and cater to the large middle class segment

In the Asian markets, bancassurance has a limited share of the total sales primarily becauseof the near monopoly of the life agents in Japan, which is the largest life market. But thereis a shift in stance with markets like Japan, South Korea and the Philippines where

bancassurance was previously prohibited, taking a more accommodating stance towardsthis channel. It has been estimated that bancassurance would contribute almost 16% of thelife premium in the Asian markets in the year 2006 primarily due to the growth expected inIndia and China.

In India the bancassurance model is still in its nascent stages, but the tremendous growthand acceptability in the last three years reflects green pasture in future. The deregulation of the insurance sector in India has resulted in a phase where innovative distribution channelsare being explored. In this phase, bancassurance has simply outshined other

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The Problems in Bancassurance

Any bank getting into business of selling insurance cannot afford to have casual approachto it. The staff, if deputed from within the existing bank staff, will have to be speciallytrained in the intricacies of insurance and the art of salesmanship. These skills will berequired at levels different from the requirements in banking operations. They will have to

be persons who have an external orientation.

The amount of business acquired through the banks depends entirely on the personal skillsof specified persons and the corporate insurance executives. An effective and successfulspecified person might perhaps find it more remunerative to branch off as an insuranceagent on his own, instead of being tied to the bank. The options available to the bank to

prevent this may lie in developing attractive compensations packages. The relevant issueswill be the restrictions imposed by insurance Act as well as relative pressures within theunions of banks of employees.

The commitment of senior management is crucial to the success of the persons deputed for the insurance work. The priorities for the managers may depend on the criteria by whichthey will be appraised at the end of the year. If the progress in insurance is not importantcriterion, the support to the insurance activities may be reduced. They would seemainstream banking activities as more important for their own future growth. Theappraisal and reward systems of the bank have to be appropriately aligned.

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Review of literature

Expansion and consolidation of bancassurance in the 21st century

Journal of International Financial Markets, Institutions and Money , Volume19, Issue 4 , October 2009 , Pages 633-64 Zhian Chen, Donghui Li, Li Liao, Fariborz Moshirian, Csaba Szablocs

Bancassurance has received much attention from both researchers and policymakers, as itis a major step towards the creation of universal financial markets in the 21st centurywhich are no longer segregated based on industry operations. This study is the firstcomprehensive study to identify and measure the determinants of bancassurance using asample of firms from 28 developed and developing countries. Our results complement theexisting literature on bancassurance demand, insurance demand, and internationalinsurance services, while also providing additional insight in key areas. The empiricalresults, based on panel analysis, indicate that reduction in company risk, the size of thecompany, reductions in company costs and increases in company revenues, the size of thenational banking industry, the level of financial deregulation within a country, and thenational inflation rate all play significant roles as determinants of bancassurance.

Selecting the preferable bancassurance alliance strategic by using expertgroup decision technique

Expert Systems with Applications , Volume 36, Issue 2, Part 2 , March2009 , Pages 3623-3629 Cheng-Ru Wu, Chin-Tsai Lin, Yu-Fan Lin

Bancassurance has enjoyed considerable success in Europe, but this concept is relativelynew for Asian countries, having emerged only in 2002. Thus, the aim of this paper is tosearch and identify the preferable bancassurance alliance structure from the executivemanagement perspectives. We adopt the analytical hierarchy process (AHP) andTechnique for Order Preference by Similarity to Ideal Solution (TOPSIS) to construct anevaluation method. Finally, this study proves that Financial Holding Company modelin bancassurance alliance models is preferable for the executive.

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Does bancassurance add value for banks? ± Evidence from mergers andacquisitions between European banks and insurance companies R esearch in International Business and Finance , Volume 25, Issue 1 , January2011 , Pages Zhian Chen, Jianzhong Tan

This paper investigates the risk and wealth effects of 72 mergers and acquisitions between banks in Europe and insurance companies during the period 1989±2004. The empiricalresults indicate that acquirers¶ total risks remain constant relative to the world, homemarket indices and home banking indices. There are no changes for the systematic risks(beta) with respect to the world market index or the home banking index. After removingworld and home market indices effect, systematic risk against home banking index reducesignificantly for domestic deals. In addition, positive wealth effects are documented. Twofactors have contributed to the bidders¶ cumulative abnormal returns (CARs): relative dealsize and being a serial acquirer. Finally, change of beta shows negative relations with

CARs.

An event study analysis of international ventures between banks andinsurance firms Journal of International Financial Markets, Institutionsand Money , Volume 19, Issue 4 , October 2009 , Pages 675-691 Sotiris K. Staikouras

The current study examines the effects on shareholders wealth as a result of the bank± insurance interface. Using a global sample of financial intermediaries and an event-studyframework the findings reveal significant abnormal returns surrounding the announcementof bank±insurance ventures. A control sample using financial institutions that do not

pursue bank±insurance deals shows negative abnormal returns with much higher magnitude in absolute terms. When the sample is separated on the basis of the bidder'snature, then bank-bidders earn significant positive returns, while the insurance-biddersexperience significant losses. The analysis further unveils either statistically significantnegative returns or insignificant values for bank±insurance divestments. Finally,

profitability, size and functional diversification are all found significant in determiningabnormal returns over various intervals.

Evaluating business performance of wealth management banks European Journal of Operational R esearch , Volume 207, Issue 2 , 1 December 2010, Pages Cheng-Ru Wu, Chin-Tsai Lin, Pei-Hsuan Tsai

This study applies the balanced scorecard method to build a performance evaluationframework for wealth management (WM) banks. Next, the study builds a framework for

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dealing with sub-criteria using the Delphi method and finally, the article evaluates the business performance of WM banks in Taiwan by applying the analytical hierarchy process(AHP) and grey relational analysis (GRA). Importantly, the proposed model can benefitthe banking sector in assessing the business performance of WM banks, making it highlyapplicable for bank managers and financial sector analysts.

Rose, Lawrence C., and Dean G. Smith, 1995, ³Expansion into InsuranceProduct-lines and Bank Shareholder Returns,´ Journal of Financial andStrategic Decisions, V8, N0. 2, 13-25.

Rose and Smith (1995) studied BHCs¶ expansion into the limited number of insurancelines allowed during the period 1974 to 1990 and found banks experienced positiveabnormal returns, especially after 13 1982.